How to Select

A Stock For
CONSISTENT
Returns?
(A Definite Stock Picking Guide
For Newbie Investors)

Trade Brains
 How to Select A Stock For
Consistent Returns?
by Trade Brains

General disclaimer:

The information contained in this book is for educational purpose only. There is no
recommendation or advise for buying or selling any types of stocks or making
investment decisions. Readers are advised to do their own research or take the help of
their financial advisor before investing.

This document contains personal ideas and opinions of the author. We have done our
best to ensure that the information published in this book is accurate and provide
useful valuable information. However, because we do not create data, we shall not be
held liable or responsible for any errors or omissions in this book or for any damage
you may suffer as a result of failing to seek competent financial advice from a
professional who is familiar with your situation. Use this book at your own risk.

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All rights reserved by Trade Brains. No part of this book may be reproduced, lent,
resold or otherwise without the prior permission of Trade Brains.

If you want to contact us, you can visit our website www.tradebrains.in or you can
write to us at [email protected]

Copyright © Trade Brains - All Right Reserved 2

 How to Select A Stock For
Consistent Returns
by Trade Brains

Who are we?

Trade Brains is a financial education blog focused to teach stock market investing and
personal finance to do-it-yourself investors. Since inception in 2017, we have got much
attention from our readers and helped many beginners to take a significant step towards
the exciting world of investing.

Our Mission: To help you Invest, Better

Trade brains is dedicated to helping
you invest better. We believe that
anyone can make good returns from
their investment if they are willing to
spend some time and effort.

Investing is not rocket science. At

Trade Brains, we are confident that the
person who is best positioned to take
care of your financial future is you.
You need to take control of your
money and start investing on your
own. After all, no one cares more about
your money than you do.

And we are working zealously to help

you become a better investor.

Copyright © Trade Brains - All Right Reserved 3

 Module 1

How to Select A Stock for

Consistent Returns

“Long ago, Ben Graham taught me that ‘Price is what you pay; value is
what you get.’ Whether we’re talking about socks or stocks, I like buying
quality merchandise when it is marked down.” - Warren Buffett

So, you are interested in the stock market and want your money to grow! You have started reading a
number of investment blogs, newspapers, financial magazines and subscribed to the Stock Tips and
recommendations from different gurus and advisors.

However, you are afraid to take the next step. Why? Because you know that over 90% of people lose
money in stock market. Now, the reason why most of them lose because they do not do their homework
first and rely mostly on their brokers to select a stock to invest in stock market. Therefore, you decide to
take the matters in your hand and intelligently select a stock to invest. You know that by doing so, either
you will win or you will learn. No blaming others or a third way.

If you are one of such investors and want to smartly select a stock to invest in Indian stock market for
consistent returns, then you are at the right place. In this ebook, I will explain to you eight steps of
questions to be answered to select a stock to invest in Indian stock market to avoid loss and get
consistent returns.

So, be with me for the next 20-25 minutes to learn the secret to intelligently selecting a stock to invest
in Indian stock market.

#8 steps to select a stock to invest in Indian stock

market:
1. Does the company have good fundamentals?

To find the answer to this question, there is a quick 2-minute drill to filter a fundamentally strong
company. Using this drill, you can filter the healthy companies so that you can proceed to investigate
further. If the company is not fundamentally strong quantitatively, there is no need to research more
about its quality like products/services, competitors, future prospects etc.

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You can move to the next steps only once you confirm that the company has given good past
performance and is worth investing in. For this 2-minute drill, you need to look into the financials of the
company.

Here are 8 financial ratios and their trend that should be carefully noted in this step:

• Earnings Per Share (EPS) – Increasing for last 5 years

• Price to Earnings Ratio (PE) – Low compared to companies in the same industry
• Price to Book Ratio (P/BV) – Low compared companies in the same industry
• Debt to Equity Ratio – Should be less than 1 (Preferably <0.5 or Zero-Debt)
• Return on Equity (ROE) – Should be greater than 20% (Avg. 3 Years)
• Price to Sales Ratio (P/S) – Smaller value is preferred
• Current Ratio – Should be greater than 1
• Dividend – High/Increasing for the last 5 years

Note: Here’s a quick summary of the above-mentioned ratios

Earnings Per Share: It is crucial to understand Earnings per share (EPS) before we study any
1
other financial ratios. EPS is basically the profit that a company has made over the last year
divided by how many shares are available in the market. However, preferred shares are not
included while calculating EPS.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑓𝑟𝑜𝑚 𝑝𝑒𝑟𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘𝑠

𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑷𝒆𝒓 𝑺𝒉𝒂𝒓𝒆(𝑬𝑷𝑺) =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠

From the prospective of an investor, it’s always better to invest in a company with higher EPS
as it means that the company is generating greater profits. Also, before investing in a company,
you should check the it’s EPS for the last 5 years. If the EPS is growing for these years, it’s a
good sign. On the other hand, if you EPS is continuously declining or unpredictably erratic,
then you should start searching another company.

Price to Earnings Ratio (PE Ratio): The Price to Earnings ratio is one of the most widely used
2 financial ratio analysis among the investors for a very long time. A high PE ratio generally
shows that the investor is paying more for the share.

As a thumb rule, a low PE ratio is preferred while buying a stock, but the definition of ‘low’
varies from industries to industries. So, different sectors (Ex Automobile, Banks etc) have
different PE ratios for the companies in their sector, and comparing the PE ratio of company of
one sector with PE ratio of company of another sector will not be useful– Apple to orange
comparison. Always compare apple with apple i.e. the PE ratio of an automobile company
should be compared with the PE ratio another company in same industry, not any Banking stock.

Copyright © Trade Brains - All Right Reserved 5

 Overall, you can use PE ratio to compare the companies in the same sector, preferring one with
lower PE. The PE ratio is calculated using this formula:

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑷𝒓𝒊𝒄𝒆 𝒕𝒐 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 (𝑷𝑬 𝑹𝒂𝒕𝒊𝒐) =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒𝑠

Now, it’s easier to find the price of the share as you can find it from the latest closing stock
price. For the earning per share, you can either use trailing EPS (earnings per share based on
the past 12 months) or Forward EPS (Estimated basic earnings per share based on a forward 12-
month projection. It’s easier to find the trailing EPS as we already have the result of the past
year performance of the company.

Price to Book Value Ratio: Price to Book Ratio is P/BV Ratio is calculated by dividing the
3
current price of the share by the latest quarter's book value per share. P/BV ratio is an
indication of how much shareholders are paying for the net assets of a company.

𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝑷𝒓𝒊𝒄𝒆 𝒕𝒐 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝑹𝒂𝒕𝒊𝒐 =
𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Generally while comparing two companies, a lower P/BV ratio could mean that the stock is
undervalued, but again the comparison should be in the same sector.

Debt to Equity Ratio: The debt-to-equity ratio measures the relationship between the amount
4
of capital that has been borrowed (i.e. debt) and the amount of capital contributed by
shareholders (i.e. equity). Generally, as a firm's debt-to-equity ratio increases, it becomes more
risky.

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 =
𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ^ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

A lower debt-to-equity number means that a company is using less leverage and has a stronger
equity position. As a thumb of rule, companies with debt-to-equity ratio more than one are
riskier and should be considered carefully before investing.

Return on Equity (ROE) Ratio: ROE is the amount of net income returned as a percentage of
5
shareholders equity. Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested.

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 In other words, ROE tells you how good a company is at rewarding its shareholders for their
investment. It can be calculated as:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 (𝑹𝑶𝑬 𝑹𝒂𝒕𝒊𝒐) =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ^ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

As a thumb rule, always invest in a company with ROE greater than 20% for at least last three
years. A regular yearly increase in ROE is also a good sign.

Price to Sales Ratio: The stock's price/sales ratio (P/S) ratio measures the price of a company's
6
stock against its annual sales. P/S ratio is another stock valuation indicator similar to the PE
ratio.
𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑷𝒓𝒊𝒄𝒆 𝒕𝒐 𝑺𝒂𝒍𝒆𝒔 𝑹𝒂𝒕𝒊𝒐 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

The P/S ratio is a great tool because sales figures, being the topline in income statement, are
considered to be relatively reliable while other income statement elements, like profits, can be
easily manipulated by using different accounting loop-holes.

Current Ratio: Current ratio is a key financial ratio for evaluating a company’s liquidity. It
7
measures the proportion of current assets available to cover current liabilities. It is a company's
ability to pay its short-term liabilities with its short-term assets.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

If the ratio is more than 1.0, the firm has more short-term assets than short-term debts. But if
the current ratio is less than 1.0, the opposite is true and the company may be vulnerable. As a
thumb rule, always invest in a company with current ratio greater than 1.

Dividend Yield: A stock's dividend yield is calculated as the company's annual cash dividend
8
per share divided by the current price of the stock and is expressed in annual percentage.

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒀𝒊𝒆𝒍𝒅 =
𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 4, then
the dividend yield will be 4%. It totally depends on the investor weather he wants to invest in a
high or a low dividend yielding company.

Copyright © Trade Brains - All Right Reserved 7

Once you are confident that the company fulfills most of the criteria mentioned above, then study the
financial reports of the company. Reading financial reports (Profit & loss statement, balance sheet, and
cash flow statement) can take a little time. That’s why first make sure that the company passes the 2 min
drill before you start investigating further. I have also written a detailed post on how to read financial
statements of a company, which you may find useful.

These financial results, however, gives only the past growth. You cannot decide whether the company
will perform the same or better in the future based on just past trends. Therefore, you need to consider
other important factors while evaluating to a company. These factors are discussed in the next steps.

2. Do you understand the Products/Services offered by the company?

After filtering the companies using their financial ratios, you need to investigate further about the
company. Understand the company first. Learn about its product and services. It’s important that the
company’s products are easy-to-understand and has a fairly straightforward business model.

You might ask why is it so important to understand the company. Let’s comprehend this with the help of
an example. Assume that you have to choose a classmate for whom you’ll be paying for 36 months of
their current expenses. In return for which he/she will give you a quarter of his/her earnings thereafter
for the rest of their lives. Whom will you choose?

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While choosing, you must be wondering to select Module
the one3 who is most likely to have a great income in
the future. Further, will you choose a guy/girl whom you know nothing about? As you don’t know that
person well, there is no way that you can predict how much he/she will earn in the future. The same
goes for stocks. If you can understand the stock, you can easily take a good decision whether to buy,
hold or sell the stock at any time. Hence, always invest in the companies that you understand.

There are a number of companies that everyone knows and understand. From toothpaste, soaps, towels,
clothes, shoes to bikes, cars, airlines, banks; there is a company behind every product. Invest in such
companies that you understand. Do not buy the stock of ‘ABC Chemicals’ without knowing what
chemical products it produces.

3. Will people still be using this

product or service in 15-20 years
from now?

The next step is to check the life-cycle of the

company. Always look for a company with a long
life. Such companies have huge growth potential
and the power of compounding is applicable to
these companies. Avoid investing in companies
having a life of just a few years.

For example, do you think people will be using soaps in 20 years from now? The answer probably is
‘Yes’. It’s been there for over 100 years and will surely continue in the future. Maybe the fragrance/form
will change, but the soap will be there. Now, take another example. What do you think about a pen-drive
or USB manufacturing company? Do you think that people, 20 years from now, will still use pen drives?
The answer is no. Everyone is moving to cloud drives. Overall, select only a stock to invest in Indian
stock market that will last for the next 15-20 years.

4. Does the company have a low-cost durable competitive

advantage or MOAT?

This concept of ‘MOAT’ was popularized by Mr. Warren Buffet. A moat is a deep, wide ditch
surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack.
Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat
them in its sector.

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 “A truly great business must have an enduring ‘moat’ that protects
excellent returns on invested capital. The dynamics of capitalism
guarantee that competitors will repeatedly assault any business ‘castle’
that is earning high returns.”
-Warren Buffett (Letter to shareholders 2007)

In other words, Moat can be defined as something that keeps a company’s competitors away from eating
away their profits/margins for a stretched time. And hence the companies with big moats are able to
generate economic profits for a longer time period. Here are the five different characteristics of a
company with a big moat:

1 Production advantage:

These are those companies which are able to find better ways of producing their products or
services. They enjoy cost advantages by improving processes, finding a better location, greater
scalability, or access to a unique asset, which allow them to offer their products or services at a
lower cost than competitors.

For example, ‘Maruti Alto’ has been the best-selling car in the ‘Hatchback’ segment of the
passenger vehicle for a very long time. This is because Maruti Suzuki has been able to build
‘Alto’ at a cheap price (with superior quality) for over fifteen years based on the demand of the
Indian audience. The can be considered a cost advantage or Moat for Maruti company.

2 Intangible Assets

Intangible assets are those assets that you can’t touch or see. A company can have intangible
assets, like brand value, patents, or regulatory licenses that allow it to sell products or services
at a bigger margin that can’t be matched by the competitors.

For example, Coco-cola. If you look at their products, they are just carbonated sugar water and
not much different from any other soda shop that you visit locally to buy cheaply priced drinks.
However, when this carbonated sugar water meets the brand value of coke, they are priced way
higher than what its competitors do, and still able to make way more sales and revenue.

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 3 Switching Cost:

A company can also create an economic moat if the switching cost for the customers is too
high. If the customer has to cost a lot of money, time, efforts or resources to switch from one
product to another, it is considered as the switching cost. If the products or services offered by a
company has high switching cost (or really difficult for the customers to give up those
products) then the firm enjoys a bigger pricing power and profit margin.

A great example of a customer switching cost is MS Excel. Although a lot of better tools
compared to Excel are available publicly, however, to make all your employees learn any new
tool, the company may have to cost a lot of time and resources.

Similarly, a few other software companies with high switching costs can be Adobe Photoshop,
Auto-desk, MS Office etc. All these complicated programs cost a lot of efforts to learn and
switching from one to another can be really difficult for the users. Unlearning and relearning
these tools demands a lot of time, money and resources like pieces of training, courses etc.

4 Entry Barrier:

There are few industries where the ‘entry-barrier’ acts an economic moat for the company.
These barriers can be because of multiple reasons like patents, brand recognition, a high cost of
set-up, government licenses etc.

For example, the telecommunication sector has an entry barrier because of the huge initial set-
up cost. Similarly, a pharmaceutical company has an advantage over its competitors’ due to
patented drugs, which may act a moat. No other pharmaceutical company can produce that
patented drug.

5 The Network Effect

These are those companies whose value increases as their number of users increases.

A few examples of companies with a big network effect in recent days can be social platforms
like Facebook, WhatsApp, Instagram etc. People are moving into these platforms as all their
friends/peers are using them which makes them more valuable. So even if there are another
better social media available, however, if your friends/family are not using them, you might be
reluctant to switch there.

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 A few industries like e-commerce or food-delivery especially enjoy the networking effect.
More customers are moving to ‘UBER Eats’ because more restaurants are associated with them.
And on the other hand, more restaurants are associating with UBER Easts because more
customers are moving into that platform. Overall, the users are inviting the restaurants and
vice-versa and the platform benefits from the networking effect.

Another great example of industries with networking effect can be ‘Credit card’ industry. Here,
customers are getting attracted to a credit card as they are accepted widely by many merchants.
On the other hand, more merchants partner up with the credit cards as they have a bigger
customer base. It’s all about networking effect for these companies.

The moat is one of the most important

factors to look in a company while investing
for long term.

For example, Colgate! It has become such a

big brand name in Indian homes that Colgate
is considered as a synonym to toothpaste.
Another example is Cadbury– the chocolate
producing company. This company is
dominating its industry and the people are
even ready to pay a lot more to buy its
products. Similarly, Tata Motors has got a
moat in ‘truck’ sector. Tata Trucks has been in
dominating in the Indian commercial
automobile sector for the last five decades.

In addition, while selecting an ‘unbreathable moat’ look for such companies in which the switching
cost is high. For example, Banks. How rarely people change their bank accounts just because the
competitor is giving 0.25% more interest rate. Maruti, HUL, ITC, Asian Paints are a few of the other
Indian companies with big moats.

5. What is the company doing that its competitors are not?

Find the unique selling point of the company. Learn what this company is doing which it’s competitors
are not. To understand better, let us analyze the Indian automobile sector.

There are a number of automobile companies in India. However, when we consider the passenger
vehicles (Cars and SUVs), Maruti Suzuki is the leading company in India. There are a number of
competitors against Maruti in this sector like Tata Motors, Hyundai, Honda, Ford, Renault etc.

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Nevertheless, Maruti Suzuki is
dominating because of the easily
available service centers that it
provides. Maruti’s service center can
be found on every corner of the
streets. It’s really simple and easy to
get a Maruti car serviced compared
to others, even in small cities.

On the other hand, try to get your ‘FORD’ car serviced in a tier-2 city. You will rarely find any
authentic ford service center around you. That’s why people prefer buying Maruti cars in India. And
hence, Maruti Suzuki is able to increase its sales consistently and give good returns to its shareholders.

6. Does the company have a big debt?

Big debt in a company is the same as the big hole in the boat. If the hole in that boat is not fixed soon,
then it won’t be able to cross the long sea and will definitely sink in between. When you’re selecting a
stock to invest in Indian stock market, read its financial documents carefully. Avoid companies with big
debts. Many times, the accountants use the financial loopholes to hide the debt in their annual results.
However, if you read the financials statements minutely, you will be able to find these debts in the
balance sheet of the company.

Besides, while investing the companies in the banking sector, look for its Non-performing assets (NPA).
Avoid companies in the banking sector with huge NPA’s.

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7. Is the company’s management efficient and qualified?

This is one of the most crucial questions to ask before you select a stock to invest in Indian stock
market. The management is the soul of the company. A good management can prosper the company to
new heights. On the other hand, a bad management can lead to the downfall of the company. Hence, it’s
really important to research carefully about the management of the company that you plan to invest

First, do some research, and find out who is running the company. Among basic things, you should
know who the company’s CEO, CFO, MD, and CIO are along with their qualifications and past
experience. Next, here are a few points to check the efficiency of the company:

— Strategy and goals

Go through the Vision, Mission and Value statement of the company. Together, mission and vision
guide strategy development, help communicate the company’s purpose to shareholders and inform the
goals and objectives set to determine whether the strategy is on track. Hence, these defined future
statements for the company can help an investor to decide whether to select a stock to invest or not.

— Length of tenure

This can help to judge the stability in the management of the company. A long length of tenure of the
top management with the steady growth of the company is a good sign. Sometimes, a change in
management is considered an adept signal when the last management was not performing well.
Anyways, in general, the long tenure of good management is the sign of a healthy company.

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— Promoter buying and share buybacks

The insiders of the company have the best knowledge about the company’s performance. The
management and the top officials can understand the future aspects of the company and if they believe
that the company will outperform in the future, they are mostly correct. Therefore, insider buying and
share buybacks are signals that the owners trust in the future of the company and it’s a good company to
select a stock to invest in Indian stock market.

In addition, the other scenario, where the promoters or CEO is selling the stocks, is an independent
activity and cannot be always treated as a bad signal. We cannot judge the company’s future is declining
just because the promoters are selling a small portion of their stocks once in a while. Maybe, the
founder need money to start another venture. Or maybe, the founders are selling the stock to buy a new
house or enjoy a vacation. Everyone has the right to sell stocks when they need it the most, and so does
the founders.

In short, the insider buying and share buybacks are signals of good company. However, we cannot judge
the company’s future based on the promoter’s selling the stock. Please note, if the promoters are selling
a lot of stocks continuously without explaining the reason, then it’s a matter to investigate further.

— Perks and compensations to staff and workers

If the company is giving good perks to its staff and employees, then again it’s a sign of good
management. The results of a company depend a lot on the performance of its staff and employees.
Happy employees will give their best performance. However, if there is continuous workers strikes or
increasing worker union demands, then it means that the management is not able to fulfill the needs of
its workers and employees. Such cases are a bad sign for investors in the company.

— Financial ratios ROE and ROCE

The management’s efficiency can also be judged using a few financial ratios. Return on Equity (ROE)
and Return on Capital Employed (ROCE) are the best tools to judge the management’s performance and
the resulting potential for future growth in value.

• ROE is the percentage expression of a company’s net income as it is returned as a value to

shareholders. This formula allows investors and analysts an alternative measure of the company’s
profitability and calculates the efficiency with which a company generates a profit using the funds
that shareholders have invested.
• ROCE is the primary measure of how efficiently a company utilizes all available capital to generate
additional profits.

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A high and steady ROE and ROCE for the last few couples of years is considered a sign of good
management. As a thumb rule, invest only in companies with the ROE and ROCE of above 20%
continuously for the last five years.

— Transparency

This is the last, but one of the most important factor while judging the management. The integrity of the
management is the key to the growth of the company. It’s the management’s duty to give
a ‘fair’ quarterly and annual results to its shareholders. Just as the management announces the good
results of the company; in the same way, the management should come forward in the times of bad
results to explain its reasons to its shareholders. A good management always maintains the transparency
of its organization.

8. Is the company constantly in the news and overly popular?

The stock market is based on the sentiments of the people. Consistent news affects the expectations
and decisions of the public. Stocks, which are very popular in news, can be inflated by the hype of
the media. As people expect great results from such companies, even after giving decent returns
the stock prices of such companies fall. That’s why try to avoid buying stocks of such companies
for easy returns. The hot stocks are subjected to market volatility and the boring stocks are the one,
which gives the best returns.

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A Few Additional Quick Tips
Here are a few additional tips to select a stock to invest in Indian stock market:

— Cheap isn’t always good, and expensive isn’t always bad

While investing in growth stocks, sometimes it’s okay to invest the stocks with a high PE ratio. Some
growth stocks have huge future potentials and can give multiple times returns. Moreover, while
selecting an undervalued stock, you should investigate further why the stock is undervalued. Many
companies sell cheaply because they do not have much growth opportunity in the future. For example,
Coal and mining sector stocks where the industry as a whole is declining.

— Invest in mid-cap companies

The mid-cap companies can give the best returns. These companies have the potential to become a
large-cap company in the long term frame. They have a high growth rate compared to the large caps
which have already reached saturation and the chances of giving multiple-time returns are highly
unlikely. In addition, Mid-cap companies have good capital to stay out of debt and live a long life.
Overall, a good mid-cap growth stock can easily become a multi-bagger, i.e. a stock which gives
multiple times returns if you hold if for long term.

— Past results do not guarantee future performance

Do not rely totally on the financial reports to select a stock to invest in the share market. The report
shows the past performance of the companies. However, future growth depends on various aspects of
management, competitors, industry, etc. It’s really important to perform qualitative analysis of the
company along with the past quantitative analysis.

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 Summary:

In this book, we discussed the key points to consider while choosing a stock to invest in. Now, let
us summarize the eight steps with questions to be answered to select a stock to invest in Indian
stock market:

1. Does the company have good fundamentals? 2-minute drill to filter companies using financials.
2. Do you understand the products or services offered by the company?
3. Will people still be using this product or service in 15-20 years from now?
4. Does the company have a low-cost durable competitive advantage?
5. What the company is doing that its competitors are not?
6. Does the company has low debt?
7. Is the company’s management efficient and qualified?
8. Is the company constantly in news and overly popular?

That’s all! I hope you have understood all the steps and questions to be answered before you select
a stock to invest in the Indian stock market. Keep learning and happy Investing!

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